Insurance and Business in India: Challenges and Opportunities for Multinationals

(GRM009)

Speakers:

• Jennifer Reno, CPCU, ARM, AIC – Global Risk Manager, QVC

• Harsh Dutia, Senior Multinational Advisory Specialist, Marsh USA Inc.

Learning Objectives

At the end of this session, you will be able to:

• Anticipate how your program will be affected by insurance-related amendments to Indian law.

• Build a route to navigate the Indian regulatory framework.

Agenda

• India – Economic and Socio-Political Perspective

• Indian Insurance Market

• Indian Insurance Environment

• Risk Manager’s Perspective

India – Economic and Socio-political Perspective

• Population of ~1.25 BN,

17% of world

population.

• 2014 GDP in US$ ~2.0

TN.

• 9th largest economy in

absolute terms.

• 4th largest economy in

PPP terms.

• Largest democracy.

Welcome to !ndia, the Land of Diversity and Large Numbers…

Making Sense of the Numbers

• Population: Larger than the US

and Western Europe put

together.

• Telecom: World’s 2nd most

mobile phone subscribers at 900

million.

• Wealth: 2nd fastest growing HNWI

market with over 100,000 HNWIs.

• Official languages: 22.

• 2nd largest Muslim population.Source: CIA country report, World Bank, IMF, Oliver Wyman analysis, Press research

5

Important Facts About the Economy

2014 – A Catalyst for Change

• Indian Prime Minster, Mr. Narendra Modi, led the Bhartiya Janta Party to a historic win with a majority after 30 years.

• Indian stock markets rally to new all-time high, outperforming world’s 10 biggest markets.

• The IMF forecasts 7.5% growth rate for India in 2016 and 7.5% in 2017.

• India set to overtake the US and become the second largest internet base in the world after China.

18,500-strong audience at Madison Square Garden to watch Indian Prime Minister Narendra Modi in Sept 2014.

7

From a low-cost labor hub, India has evolved to become a research and innovation hub for global corporations.

The offshoring value chain

Imp

act

Time

I

II

Cost

arbitrage

gains

Process re-

engineering

Business

transformation/

High-end analytics

Innovation through

research

Global corporations have exploited the opportunity!

Company Presence in India

Global

Innovation

Firm

Employs over 150,000 people in India – 33%

of its global workforce.

Global Bank ~10,000 people across 10 centers supporting

global operations.

Global

Business

Services Firm

Set up an innovation hub in Chennai – first for

the company outside the developed world.

Global Auto

ManufacturerExports 40% of its engine production and 25%

of its car production to over 35 countries.

India today

The India AdvantageAvailability of Skilled, Qualified Talent• # higher education institutes in India:

– 400 universities.

– 16,000 colleges.

– 1,500 research institutions.

• # graduates added: ~3.7 million per year.

• # post-graduates added: ~0.3 million per year.

IV

III

Ease of Doing Business –India’s Ranking

Factors Ranking

Days to Start a New Business 155 (29 days)

Getting Credit 42

Paying Taxes 157

Dealing with Construction Permits 183

Getting Electricity 70

Registering Property 138

Protecting Minority Investors 8

Trading Across Borders 133

Enforcing Contracts 178

Resolving Insolvency 136

Source: World Bank’s Doing Business 2016 Report

India is a land of opportunities,

… but a challenging trading environment?

Infrastructure Bottlenecks

Select Your Right Local Business Partner

Partner With Local State Government and Center

Multinational Success in India Has Not Been Uniform: Key Lessons

Manage the Unpredictability

Adapt to Socio-economic Environment

Indian Insurance Market

Indian General Insurance History

Regulatory Framework

• Mandatory Insurance:

• Automobile liability.

• Public liability for industries/companies handling hazardous substances.

• Errors & omissions for various professionals and service providers like stock

brokers, insurance brokers, etc.

• Workers’ compensation in India is a statutory liability, but

NOT a statutory insurance requirement.

• Non-admitted insurance is not allowed.

13

Regulatory Framework

• Maximum permissible Foreign Direct Investment in any

insurance company or insurance intermediary is 49%.

• Regulations mandate maximizing domestic market retention and

saving outflow of foreign exchange.

• Cash before cover: Section 64VB (important for global clients –

premium allocations).*

• Large capacity for engineering and onshore property risks.

• Terrorism risk cover is administered by GIC Re as manager to

the terrorism insurance pool. The terrorism pool has a per

location capacity limited to maximum of US $250 million (PDBI)

(INR 15,000 m).

*Section 64 VB: A section of IRDA Act, 1999

14

Terrorism Insurance Cover

• Cover administered by GIC Re as

manager to the terrorism insurance

pool (revised limits wef 1st April 2014).

• Per location/compound.

• Coverage limited to maximum of INR 1,500

Crores (US$220 million for material damage and

LOP).

• By Q2 2016, coverage limit is likely to be

increased to INR 2,000 Crores (US$294 million).

• Premium Rate – INR 0.23 per mille.

• Industrial risks (i.e., risks ratable under Section

IV,V,VI and VII of All India Fire Tariff and under

Petrochemical Tariff).

• Mid-term inclusion allowed with 15

days waiting period.

Indian Insurance Environment

17

Indian Insurance Industry Overview

INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA)

(MAIN REGULATORY BODY)

LIFE INSURANCE GENERAL INSURANCE REINSURANCE BROKERS

US$ 53.3 billion

1 govt. entity

23 private entities

Players include: Prudential,

Allianz, AIG, AXA, Standard

Life, New York Life, Met Life,

Old Mutual, Aviva, Sun Life,

Cardiff & ING

LIC (73 %)

ICICI Pru (5%)

SBI Life (4%)

HDFC Standard (4%)

US$ 11.5 billion

4 govt. entities

23 private entities

Private players include: AIG,

Allianz, Chubb, Fairfax, Tokio

Marine, RSA and Mitsui

Sumitomo

New India (14.86 %)

United India (12.52%)

Oriental (9.2%)

National (13.21%)

ICICI Lombard ( 8.85%)

GIC, National Reinsurer

European and Asian

reinsurers large capacity

providers (i.e., Swiss,

Munich, Lloyds)

Hannover Re opened

liaison office

Active and licensed

around 300+

brokers

Major global

brokers present

Broker penetration

is increasing

RANK GLOBAL PARTNER COMPANY OVERALL MARKET SHARE

1 Lombard – Fairfax Holdings, Canada ICICI Lombard General Insurance 7.89 %

2 Allianz Bajaj Allianz General Insurance 6.18 %

3 Tokio Marine IFFCO Tokio General Insurance 3.83%

4 Ergo HDFC ERGO General Insurance 3.76 %

5 AIG Tata AIG General Insurance 3.21%

6 Royal Sun Alliance Royal Sundaram General Insurance 1.85 %

7 Mitsui Sumitomo Cholamandalam MS General Insurance 2.23 %

8 Generali Future Generali India Insurance 1.70 %

9 AXA Bharti AXA General Insurance 1.72 %

10 Sompo Universal Sompo General Insurance 0.83%

11 Insurance Australia Group (IAG) SBI General Insurance Company Limited 1.86%

12 QBE Raheja QBE General Insurance Co. Limited 0.03%

13 Liberty Mutual Videocon Liberty General Insurance Company 0.34%

14 HDI Gerling Magma HDI General Insurance 0.56%

* Other major insurers: Either state owned Insurers or 100% privately held.

International P&C Insurers PresenceJoint Ventures in India

Reinsurance Framework in India• GIC Re is the national reinsurer.

• 5% obligatory cession to national reinsurer (for all lines).

• A reinsurer should have a minimum credit rating of BBB (S&P)

or an equivalent for facultative reinsurance. Limits allowed

based on rating is as follows:

• Many global reinsurers like Swiss Re, Munich Re, and Hannover

Re have representative office in India.

• Insurance regulator encourages use of local insurance market

capacities before reinsurance outside India.

Rating of Reinsurers (as per Standard & Poor and applicable

to other equivalent international rating agencies)

Limit of Cession Allowed

Under Regulation 3(11)

• BBB of Standard & Poor 10%

• Greater than BBB and up to & including AA of Standard &

Poor

15%

• Greater than AA and up to & including AAA of Standard &

Poor

20%

Market Impact• Property Insurance

• After price detariffing in 2007, property insurance rates excluding NatCat rates

have plummeted as much as 90-95% from erstwhile tariff rates.

• To further control the downward pressure on pricing, India’s insurance regulator

has issued a notification on Nov. 12, 2014 providing a broad framework to price

risks on a burning cost basis.

• Employee Health Insurance

• As property prices were detariffed, health premiums started increasing due to the

elimination of cross subsidy and increasing health inflation.

• Health premium rates have increased on average 10-15% p.a.

• Marine insurance rates have remained flat during the past few

years and are largely going on risk-based pricing except for a

few marquee accounts.

Property Insurance – Detariffication• January 1, 2007 Onwards for Pricing Flexibility.

• Jan 1, 2007: Discounts allowed up to 51.25%.

• January 1, 2008: Full price freedom.

• Today the discounting has gone down to 80% and in competitive areas it has gone down as much as 90%.

• January 1, 2009 – Partial Policy Wordings Freedom.

• The total wording detarrification hasn’t happened.

• Currently standard market wordings have to be followed for consistency in interpretation. However, new add-ons/coverage extensions can be filed by individual insurers. Hence some customization is possible.

• For property damage, industrial all risk (IAR) is the broadest possible cover available, which may not address the needs of all customers.

• 2012 – Tariff Premium Rates for NatCat Perils (EQ , STFI).

• November 2014 – Burning cost circular issued by IRDA, led to significant increase in property premiums.

• 2016 – Use and File Guidelines (exposure draft circulated by regulator).

• STFI premium loading from March 1, 2016.

Market Conditions

• Employee health insurance (group health):

• As property prices were de-tariffed, health premium started increasing due to the

elimination of cross subsidy and increasing health inflation.

• Health premium rates have increased on average 10-15% p.a.

• Marine insurance: Rates have remained flat during the past few

years and are largely going on risk-based pricing except for a

few marquee accounts.

• Machinery breakdown/electrical equipment insurance: Rates

have not been much affected by detariffication as there are

frequent claims under this category. These rates have been at

60-65% discount.

• Liability insurance: Premium rates are stable. More awareness

for products like D&O, CGL, crime, and cyber.

Regulation for Insurers With Foreign JV Partners

• Foreign investors in a domestic insurance JV can nominate non-CEO-type key management personnel, provided such appointments are approved by the board where the majority of the directors, excluding independent members, are the nominees of domestic promoters.

• Majority of directors, excluding independent directors, should be nominated by the domestic promoters/investors.

• Domestic promoters/investors will nominate the chairman in cases where the chairman has a casting vote.

• The quorum at board meetings will be decided by the presence of the majority of domestic directors. This is regardless of the presence of the foreign partner’s nominees.

Spot the Issues in This Picture!

Safety Standards?

Safety by Multinationals

Construction Safety!!

Risk Manager’s Perspective

Risk Manager’s Perspective

• Local Compliance v. Good Business Practice

• Brokers

• Know Your Organization – Past, Present and Future

• Corporate Risk Tolerance

Thank You

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